Weak 1Q16 results but should be in the share price
Angang announced its 1Q16 results on PRC GAAP basis after market close onApril 29th, 2016. The Company announced revenue of RMB11.3bn, achieving21% DBe and 21% Bloomberg consensus, respectively. Its NPAT wasRMB615m net loss, while DBe was RMB1,033m and Bloomberg consensuswas RMB539m net loss. As Angang has announced profit warning on April 14,we believe that the weak results are already priced in.
GP not improved as much as benchmarks but significant SG&A cut
While HRC concurrent spreads have improved c. RMB250/t QoQ in 1Q16,Angang’s gross profit only recovered from negative RMB1,065m in 4Q15 toRMB733m in 1Q16, translating to less than RMB70/t QoQ improvement.However, the company managed to cut its SG&A to only RMB850mn, down16% QoQ, a new low in the past 4 years for quarterly SG&A.
Concerns remain on negative cashflow and rising net gearings
Angang reported a big negative cash flow from operation as large asRMB1,385 in 1Q16. The management attributed this weak operating cashflowto the company’s cease of trade finance to reduce exchange risks. Thus, theongoing operating cashflow might not be as bad as it appeared in 1Q16.However, Angang’s net gearing ratio continued to climb from 58% as of FY15year end to 62% as of 1Q16 quarter end. Angang seems to increase its futureexposure from RMB26mn as of FY15 yearend to RMB121mn as of end of4Q16. We have concerns these new exposures might create some unexpecteddownside/upside risks.
Benefit from short-term restocking cycle; Hold maintained
We remain cautious on China steel industry for mid to long term as we havenot yet seen significant capacity rationalization. However, we believe thecurrent restocking cycle will likely to peak out in June, highlighted in the report“When will this cyclical recovery peak out” published on April 15, 2016.Angang is now trading at 0.5x 12-month forward PBx. Hold rating maintained.